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As a rule of thumb taxpayers earning approximately $35,000 or less should favour the TFSA, while higher-income earners are likely to benefit more from contributing to an RRSP.

Other factors to consider are years remaining to retirement, income level before retirement, expected reliance on the different programs in retirement, level of expected income in retirement, and of course life expectancy.

But keep in mind that this rule of thumb only applies to the first $ 5,500 contribution. For taxpayers who can save more than $ 5,500 and who are in the middle-income bracket the differences between the two accounts are modest but benefit slightly by maxing out their TFSA and putting the rest in their RRSP. For high income earners, the reverse is true, max out your RRSPs contributions and use a TFSA for additional savings.

The table below provides a comparison between the two accounts:

TFSA vs. RRSP

TFSA

RRSP

Age minimum

No minimum though you must have earned income

18 years old or older

Contriution limit

The lesser of 18 per cent of your earned income or $25,370 for the 2016 tax year

A maximum of $5,500 for the 2016 tax year (see above for other tax years)

Carry forward

Until plan is wound up

Indefinitely

Tax deductibility of contributions

Yes

No

Consequence of withdrawal

Taxed at marginal rate

No tax

Tax implications in retirement

withdrawals are considered income regardless of how the income was earned (in the form of interest, dividends, or capital gains) and taxed at your marginal tax rate at the time of withdrawal. This may result in clawback from other programs such as Old Age Security

Withdrawals are not considered income and do not result in clawbacks from other programs.

Spousal contributions

If you contribute to your spouses plan, your contribution room will be affected.

If you contribute to your spouses plan, their contribution room will be affected.

Since its introduction in 2009, Tax Free Savings Account has been getting a lot of attention and for good reason too. When earned in a TFSA investment income (including capital gains and dividends) are not taxed even when withdrawn. The downside is that unlike Registered Retirement Savings Plans (RRSP), contributions made to a TFSA are not deductible for income tax purposes.
Moreover, the name is slightly misleading as it suggests that contributions must be cash in a savings account. Just like RRSPs, TFSA may contain other investments such as mutual funds, stocks (with some restrictions), bonds, or even Guaranteed Investment Certificates (GICs).

The table below captures the many changes to the TFSA contribution room since 2009:

TFSA Contribution limits

Years

TFSA Annual

Cumulative

2009-2012

$5,000

$20,000

2013

5,500

25,500

2014

5,500

31,000

2015

10,000

41,000

2016

5,500

46,500

2017

5,500

52,000

When is TFSA more advantageous than RRSP?

You expect to be a high earner in retirement

You expect to earn a considerable pension. In such a case the income from your pensions and your RRSP or RRIF withdrawals in retirement can place you in a higher tax bracket than when you were working.

You earn less than approximately $ 35,000 a year. If you are a low-earner, you benefit from forgoing RRSPs altogether. In retirement, withdrawals from RRSPs and RRIFs can result in Old Age Security and Guaranteed Income Supplement clawbacks.